Fed Decision, Trans-Tasman Bubble | Fonterra

23 March 2021

Global markets ended a volatile session higher (S&P 500 index +0.3%) with the US market hitting fresh highs as Federal Reserve Chairman Powell comments were positively received by markets.

The focus overnight was the much anticipated US Federal Reserve announcement given the recent move in interest rates. Chairman Powell continued to project near-zero interest rates at least through 2023, suggesting consistency with the Fed’s view that it will tolerate a period of above-target inflation before considering raising interest rates. This is in contrast to the market, with some starting to expect rate hikes from late 2022, but the Fed are of the view that any inflation bump short-lived. Overall the announcement was supportive for equity markets.

Closer to home, the NZ government is targeting the first fortnight of April to open the long-awaited trans-Tasman travel ‘bubble’ with Australia. Barring any new community outbreaks or lockdowns caused by covid-19, it has been reported that April 15 was described as a “conservative” target date by one highly placed source. We see Auckland Airport as the biggest winner under trans-tasman bubble scenario as 41% of total International passengers were from the trans-tasman route and there is likely significant pent-up demand. This means that AIA will be profit making (from current loss making) & the retail side of the business will pick up. 


Fonterra Shareholder Fund (FSF:NZX)

Dairy cooperative Fonterra (FSF) shares were lower after announcing their 2021 first half result, reporting a net profit after tax of $391m , which was down -22% from the previous year due to the gains reported on the sale of divestments in 2020. Normalised profit after tax came in at $418m, up +43% from last year thanks to strong performance from Greater China business both for Foodservice and Consumer categories.

The drag being that higher milk commodity prices will put pressure on margins and earnings particularly for Fonterra (non-farmer) shareholders as commodity prices are set to be higher in the second half. We still see the structure as benefitting farmers over non-famers, which is a major issue when it comes to buying FSF shares.

We must admit Fonterra has made good progress to bring down debt levels ($2bn of divestments near complete) and stabilise earnings. Having laid out the principles of its strategy going forward, detail is still lacking with this required to avoid some of the issues of the past, support the investment case and make informed decisions around capital structure. 

On balance we remain HOLD rated on Fonterra and prefer A2 Milk in the dairy sector. 


Australia & New Zealand Market Movers

The Australian market closed lower yesterday (ASX 200 Index -0.5%), as energy and sectors and miners ended the day lower.

The technology sector ended the day in the green as it recovers from its major sell off over the last month, with Wisetech up +2.9%, and Xero up +1.2%. Xero Announced an 3-year agreement with BDO as a Xero Global Partner, in which Xero will become BDO's preferred accounting solution for its Business, Services and Outsourcing clients in the SME space – which is expected to significantly grow XRO's clients from BDO. Buy now pay later was in focus with mixed results after Commonwealth Bank announced their own version of the service – Surprisingly Afterpay (+1.2%) and Sizzle (+1.8%) ended the day up, while Zip Co fell -1.8%.

LNG and giant giants Woodside(-0.9%) and Santos (-0.8%) ended the day weaker as oil prices gave back some recent gains. 

There has been upbeat commentary from leading retailers in Australia who remain optimistic about the year ahead. As long as consumers can’t travel overseas, retail sales are likely to remain elevated. In addition, unlike The Reject Shop’s CEO earlier in the week, Kmart Group’s MD highlighted there we no signs consumers were starting to shop more cautiously before JobKeeper comes to an end in two weeks.

The New Zealand market was down on Wednesday (NZX 50 index -0.5%) ending tis five that rally as investors wait on the US Federal Reserve meeting on Wednesday night. 

The Gentailers were weaker given their sensitivity to a possible rise in interest rates, Contact (-4.5%) and Meridian (-2.8%) down the most – also on the back of the potential selldown from green ETF coming up soon.

Tourism Holdings had the day’s biggest gain, up 5% as rumours swirl of a trans-Tasman bubble opening in early April. On the flipside, a trading update from Sanford (-7%) highlighted a difficult trading environment, with price under pressure plus supply chain costs and inventory costs higher

Z Energy shares also jumped (+4%) as the company announced their intention to resume paying dividends from May, 6 months earlier than previously guided, after renegotiating covenant waivers with its banking syndicate and USPP holders.

3 Things Markets will be Watching this Week

  1. Highlight this week include the latest US Federal Reserve rate decision and Fed Chair Jerome Powell’s news conference along with rate calls from the Bank of England and Bank of Japan. The announcements will be watched closely given the recent move in interest rate markets. 
  2. In Australia, the latest minutes from the recent RBA meeting are due along with employment and retail sales data.
  3. In NZ, 4th quarter economic growth (GDP) data is scheduled for release later in the week while Briscoe Group, Fonterra and The Warehouse Group will all report earnings.


The focus overnight was the much anticipated US Federal Reserve announcement given the recent move in interest rates. Chairman Powell continued to project near-zero interest rates at least through 2023, suggesting consistency with the Fed’s view that it w

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